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I think this penny stock is an absolute bargain

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Gold bullion on a chart
Image source: Getty Images.

Although some penny stocks are ‘smaller’ companies that can be riskier than FTSE 100 giants, they can also achieve greater growth. Pan African Resources (LSE: PAF) is a penny stock that I am particularly attracted to. Indeed, the gold-miner has performed strongly these past few years, delivering consistent profits and growth. As such, I added the stock to my portfolio a few weeks ago. Here are the main reasons why.

Strong trading update

Unfortunately, the company’s last trading release only covered the year ending 30 June 2020, and a trading update for this year has not yet been issued. Nonetheless, those last results were still affected by the pandemic, and they were impressive, I feel.

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For example, the company generated profits of $44.3m, an increase of 16.6% from the year before. Net debt was also reduced by over 40%. Compared to other penny stocks, this gives me hope that Pan African Resources is not overly risky, being both financially stable and generating strong profits.

There was also increased gold production to nearly 180,000 ounces, and this is expected to increase to 195,000 ounces for the current financial year. Therefore, I believe that profits can rise this year, thanks to this increased production.

Nonetheless, it must be mentioned that profits are heavily dependent on the price of gold. After booming last year, the gold price has looked shakier recently, falling significantly from its highs last August. This is a risk that must be considered. You see, when the price of gold falls, it often has an adverse effect on the Pan African Resources share price. And it is a risk completely outside of the company’s control.

Dividend

Another reason why I bought this penny stock was its dividend. Firstly, it has a yield of around 3.6%. Although this is not extraordinary, it is still fairly large and gives a compelling reason to invest.

The company’s dividend policy is also prudent, and this demonstrates good management, I feel. For instance, it aims to pay out 40% of net cash generated from operating activities, and this allows the company money to reinvest into its operations. There is an expectation that this dividend will be able to increase over the next few years. I always look for a company that pays a fairly large dividend, while also reinvesting in itself, and PAF ticks both of these boxes.

Why is this penny stock such a bargain?

It has already been established that PAF has performed well in the past and has good prospects. At its current price of around 19p, it also trades at a price-to-earnings ratio of around 13. Although this cannot be used alone to show that PAF is a bargain, it still demonstrates a very reasonable price, especially in comparison to other miners.

Further, there has also been significant insider buying recently from the CEO, Jacobus Albertus Loots. Indeed, Loots bought around £6.8m worth of stock, to further increase his stake in the company. This shows optimism from management, and Loots clearly feels that the share price is too cheap. I share this optimism in this penny stock and believe that it is a bargain at its current price.

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In 2019, it returned £150million to shareholders through buybacks and dividends.

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Stuart Blair owns shares in Pan African Resources. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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